Share of Coca-Cola, as measured by dividend yield, are the cheapest since the chaotic low-point in the company’s history following its short-lived formula switch to ‘New Coke’ in 1985.
After trailing the Dow Jones Industrial Average in 2009 and so far in 2010, Coca-Cola is leading the market today on the back of an upgrade from UBS analyst Kaumil Gajrawala.
“Other than during early ’09 when the market crashed and Coca-Cola shares yielded over 3.7 percent for a short period, its current yield of 3.3 percent is the highest since 1986,” wrote Gajrawala, in a market-moving note to clients this morning. “This attractive dividend yield should provide downside support.”
Investors, which have poured money into bonds over equities in the last year, may find a stock like Coca-Cola attractive these days because the spread between its dividend yield and a 10-year Treasury is essentially zero, notes Gajrawala. So you potentially get the steady income of a Treasury, plus the chance of upside in the stock, which this UBS analyst sees as likely scenario.
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Gajrawala projects a 15 percent rise in the stock over the next 12 months, along with a dividend payout increase that would bring the yield to an even higher 3.4 percent. That’s a total return of 18 percent.
What’s depressed the shares so far this year is the company’s decision to acquire Coca-Cola Enterprises entire North American bottling unit, which is traditionally a lower-margin, slower-growth business. However, after their initial disappointment, shareholders are reconsidering the new model of aligning the producer and bottler together.
New products such as energy drinks, teas and water are what drive growth now at Coca-Cola and PepsiCo, which completed a similar acquisition of its bottler this year. The transactions will allow the companies to rollout new products at a faster pace, now that the production and distribution are under the same tent again, according to investors and analysts.
Ironically, the "New Coke" debacle, where the company was forced to pull the new formula three months later, reinvigorated the company’s sales in 1986 as consumers re-discovered how much they liked the old Coke, rebranded as “Coca-Cola Classic.” Perhaps investors will “Catch the Wave” once again.
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